I had a client ring me at 8:30 this morning. He and another totally different client are both looking at funding for a car or their business. I have pointed out to both of them that banks and finance companies sometimes quote low interest rates but do not point out initially their establishment fees and ongoing bank charges, which for another client increased the overall interest rate by approximately 1.5 or 2 percent. The client who called is interested in saving money on the costs of his current business funding. He already knew some other important facts:
• Sometimes when a bank is seeking your business, you can negotiate to pay zero establishment fees or a very small fee. Remember the fees incurred might out way the interest saved.
• The ongoing annual fees must be taken into account as they add to the overall effective interest rate.
• Merging lots of small loans may also reduce the overall cost.
• When you are arranging finance for land on which you intend to build, make sure the finance for the building project will be easily attainable.
When looking at a novated lease versus loans, hire purchase and other financial products, those offering the novated lease have the software to compare the lease versus, a bank loan. However you have to make sure the figures reflect a true comparison:
• Don’t just ask for the interest rate on the vehicle finance, make sure both parties know exactly what residual you want such as 20% or even 0% of the value of the car and that they are both using the same number of months for the finance contract, plus both know you want a monthly or fortnightly repayment.
• Then make sure you are told by the financial institutions the monthly or fortnightly repayment. Supply the repayment amount for the bank’s financial contract to the novated lease company so you can see that it is entered into their schedule which compares the two products.
• Also make sure the novated lease company is allowing for what you truly expect to spend on fuel, and other annual expenses which will occur over the term of the contract.
• Also check whether you can use a different insurance company than the one they normally use and if so supply the cost per year for your insurer to be entered into the comparison spread sheet.
• Make sure they know the correct gross income you receive and current taxes you pay.
• Ask them to show you clearly where all these figures are entered in their comparison spread sheet.
• Then compare the bottom line which is the income you have left after tax and after paying for your car.
Without all this information even an accountant cannot correctly compare the different options. You may as well supply it to the novated lease sales representative to do their comparison than pay your accountant to do it for you. Just make sure they show you clearly the figures they have entered into the comparison and the alternate option has been accurately represented.
My client, with the large patio, was purchasing a new truck under finance near the end of the financial year. They happened to mention it to me late in June and asked if it made any difference whether they bought it then or in July. I was able to explain to them that there are significant depreciation advantages in purchasing it in June rather than July . My client has always been excellent at negotiating finance contracts for their many vehicles. However this time they could not see a few hidden costs. They normally use finance companies for hire purchase contracts, chattel mortgages or loans, but they decided to give a bank a go this time. Instead of the normal $560 establishment fee, the bank charged around $1150. The bank pays about $750 to the caryard or broker for establishing the loan and charges $400 to cover its own fees. My client compared the repayments and found the bank was still cheaper than the finance company, so she went ahead. What she couldn’t see was a difference the bank had almost hidden from her. Their loan required the first instalment to be paid “in advance” on the day they took possession of the vehicle, whereas the finance companies required the first instalments to be paid “in arrears”, which is one month after the contract commenced. The bank’s loan effectively means the first instalment is not actually borrowed because it’s repaid in the very beginning and so of course they can charge a lower repayment because they do not have to charge interest on the first instalment. When I converted it to the normal terms and establishment fees of a finance company, the interest rate was effectively .38% higher on a loan for more than $100,000. I have seen a bank do the same thing for a car loan, the high establishment fees added 1.5% to the quoted rate. I suggested to my client that next time, since they will already have a relationship with the bank, they should try going direct to the bank to see if they can avoid the extra establishment costs.
My client’s daughter is currently shopping for a new car. She has saved the funds to be able to pay cash for it if she wanted to. However she has decided to accept her parents’ advice and borrow the funds, for two reasons; firstly she wants to establish a credit rating and secondly they think it’s wise for her to hang onto her savings for possibly a deposit on a house or to assist her if she is in between jobs at any time . However the financial institute only wants her current payslips and the part-time job she has now earns too little for her to get a loan on that basis. I suggested they insist on supplying other documentation which they had, to show her ability to repay the loan even if something went wrong. I explained I had worked as the accountant for a finance company a long time ago and there were managers in that company with common sense, who would see she was not a risk from the evidence she had when processing her application. They asked me if I would sign a letter addressed to the finance company and I had to say no, as I do with all my clients. I went on to explain to them that all CPA public practising accountants are warned not to sign letters to finance companies on behalf of their clients because the financial institutions like to be able to hold us responsible if anything goes wrong. I told them they were welcome to supply my phone number on their letter and I would tell the truth to the financial institution if they called me.
My client explained to me that she had made arrangements with her children that when they had saved up a large amount, they could transfer it to her and her husband to place in their mortgage, instead of putting their money in a term deposit on a low interest-rate. When they want their money back they will be given a once off tax-free gift as a thank you for reducing the interest on their parents’ mortgage. I told her my husband and I had done a similar thing when we were younger and had a mortgage. My husband’s parents loaned us money when we purchased our home, eventually a long time after we had repaid the initial loan, we gave them a once off big thank you gift.